Thursday, October 3, 2013

During the winter of 1999-2000, the price of home heating oil virtually doubled
in some Northeastern states while storage levels of middle distillate
stocks—the range of home heating oil and diesel fuels—sharply declined.
The situation attracted lawmakers’ attention and concern. Of the U.S.
households that use heating oil to heat their homes, 69% reside in the
Northeast. The Northeastern states continue to rely on heating oil as a
source of home heating, but at a reduced level of dependency compared to
2000. The Northeast demand for home heating oil has declined by 47% since
2000, from nearly 7 billion gallons to 3.6 billion gallons in 2011. However,
the price of heating oil has increased more than 2½ times from roughly
$1.50 per gallon beginning in 2000 to just over $4.00 gallon in early
2013. The price increase reflects the trend in the price of crude oil.

Both population and housing occupancy rates ostensibly drive heating oil
demand. Both increased in the Northeast over the past decade. At the same
time, improved insulation and more energyefficient heating systems in
newly constructed homes may have offset demand. As a percent of overall
domestic demand for natural gas, the Northeast region has remained nearly
steady, varying between 20% and 22%, and recently returned to a level
barely above 2001-2002 demand. Natural gas, electricity, bottled propane,
and wood can substitute for heating oil. Natural gas demand in 2011 barely
exceeded the 2000 demand. While natural gas production in the Northeast has
increased because of unconventional gas shale development, the existing
pipeline distribution system has not expanded in the New England States.
Retail electricity sales have increased in New York and Pennsylvania, the
two most populous states in the Northeast, while sales in the New England
states remained nearly level. While the Energy Information Administration (EIA) does
obtain volume data on residential propane sales, it does not publish this data.
However, U.S. propane residential prices did rise from $1 per gallon in
2000 to over $2.80 per gallon in 2012. Residential use of kerosene has
also declined.

In response to the 1999-2000 heating oil price spike and supply shortage, the
United States Congress authorized the Northeast Home Heating Oil Reserve
(NHHOR) in the Energy Policy Act of 2000 (P.L. 106-469). As a two million
barrel emergency stockpile of government-owned heating oil, NHHOR was
intended to meet roughly 10 days of demand by the Northeastern states at
the time it was created. Congress also authorized the National Oilheat Research
Alliance (NORA) to develop projects for the research, development, and
demonstration of clean and efficient oilheat utilization equipment; and to
operate programs that enhanced consumer and employee training.

Middle-distillate range petroleum products can serve as a heating and
transportation needs. In its 13-year history, NNHOR has only released fuel
for use by federal, state, and local emergency responders during natural
disasters and not for retail sales during market dislocations. While the release
demonstrated the utility of maintaining a distillate stockpile, the authorizing
legislation had only anticipated a heating oil supply shortage during
market dislocation. The recent change out of NHHOR stocks with ultra-low
sulfur distillate increased its utility as a transportation fuel. In the
absence of NHHOR, residential consumers have the recourse of substituting
ultra-low sulfur diesel fuel for their heating needs.

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